Microlending: A key to freedom or financial prison?

Meager Beginnings

Microlending is allowing more and more women to own their own businesses, but some adjustments to the process are still needed.


The idea of springing people from poverty by advancing them small amounts of money has been around for a while, but the modern template for this practice was created in the 1970s. At that time, Grameen Bank from Bangladesh started to encourage poor women who lacked collateral to form small groups in which each borrower was liable for all the others’ debts. Groups met weekly and handed their payments to a loan officer. Astonishingly few groups defaulted.

By transferring tasks normally done by well-paid bankers – such as managing individual debts  – to poor people, Grameen had brought banking costs down so much that it could afford to lend tiny amounts to individuals for entrepreneurial purposes. For their innovation and efforts, Grameen Bank and Muhammad Yunus, its founder, were jointly awarded the Nobel peace prize in 2006.


Bangladesh has well over 500 microfinance providers, lending to almost a third of rural households – some of whom borrow from more than one financier at a time. Critics of microfinance argue that borrowing from multiple sources leads to over-indebtedness, trapping people in poverty.

However, a recent study published by World Bank found no evidence that this is the case. Rather, their findings suggested that borrowing, whether from one institution or several, increases personal expenditure, household assets, the labour supply, and children’s education. Moreover, loans benefit Bangladeshi women more than men.

Helping Women Most

In fact, they do as they are designed to. Although microfinance has the ability to empower women, the connection is not always so straightforward or easy to make. Simply handing over money and giving them access to financial assets and resources creates a new set of challenges, thus balancing the experience of empowerment with the experience of extra burdens. These challenges emanate in the economic, political-organizational, ideological, and cultural domains within which microfinance institutions and microcredit lending programs are embedded.

Microlending- women with small businesses

Microlending- women with small businesses

For comparison, a 10% increase in men’s borrowing raises household spending by 0.04% and the male labour supply by 0.18%. Although the figures are modest, they are still significant. However, borrowing by women pushes household spending up by 1.5x, and the female labour supply by nearly 3x as much. This is because even a tiny loan frees women to work who might otherwise be trapped in household chores. Women’s borrowing notably also raises school enrolment rates by 8 percentage points.

The Risks

However, researchers have turned up stories of debt delinquents who were forced to sell assets such as livestock and cooking pots to make weekly payments. Despite the aforementioned World Bank study, Bangladeshis were soon faced with over-indebtedness and mass loan defaults.

As expected, offering small loans did increase business investment. However, it had a negligible effect on poor people’s fortunes. Borrowers seemed to cut back on employing others via waged work in order to spend more time bent over their own sewing machines or running their own small, not terribly profitable, shops.

Improving the Idea

What tiny entrepreneurs really need is a combination of assistance to better conduct their business with microloans that can be repaid only when their businesses start bringing in more money. But assessing individual borrowers’ unique situations is expensive. Lenders cannot afford to do much of such individual assessment until technology helps bring the cost down.

In addition, in many countries lifting restrictions on interest rates would encourage lenders to create better products. A calibration of expectations between lenders, borrowers, and the government would help, too. Microlending has gone from being the silver bullet for ending poverty, to the awful instrument of over-indebtedness, trapping people in poverty. It may have potential, but it is currently better to think of it as a vital work in progress.

With a few tweaks, microlending could prove to be a powerful tool to empower women in the fashion industry supply chain, especially places like Bangladesh, India, and Pakistan, but unfortunately we have to await another day.

Black woman working by her sewing machine on candlelight, Varanasi Benares India

To know more:

Banker to the Poor, Micro-Lending and the Battle Against World Poverty by Muhammad Yunus
Dynamic effects of microcredit in Bangladesh by Shahidur Khandker and Hussain Samad
Empowering Women through Microfinance by Susy Cheston and Lisa Kuhn
Women’s empowerment and microfinance an Asian perspective study by Vani S. Kulkarni

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About the Author

Gilberto is an economist and entrepreneur with 15+ years background in financial services, communications, product development and innovation.

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